And those three reports on inflation will be followed the next week by Federal Reserve Chairman Alan Greenspan's Humphrey-Hawkins testimony. No wonder traders have the jitters.

"The bond market has been a bit edgy," said Joel Naroff, chief bank economist at First Union. "Any whiff of inflation is going to make it jumpy."

Despite the dangers, Naroff thinks both the Producer Price Index and the Consumer Price Index will be relatively benign. "It'll calm some nerves," he said. Naroff thinks the core rate (which excludes food and energy prices) of the PPI will fall 0.2 percent for January while the core CPI will rise 0.1 percent.

Other economists agree the PPI and the CPI will remain under control for January. The consensus estimate of economists surveyed by CBS.MarketWatch.com is for the PPI core to be unchanged and the CPI core to rise 0.2 percent.

Import prices

The danger could come from the little-watched import and export prices report on Wednesday, said Richard Berner, chief economist at Mellon Bank. Falling import prices have helped keep domestic inflation under control, but that beneficial influence is beginning to wane as the dollar weakens, he said.

Naroff agrees that the import price index could be a surprise, but one the markets will largely ignore at their peril. He's fought and lost a battle to get the markets to pay more attention to the data. "A major factor keeping prices under control has been import competition," he said.

Naroff thinks import prices will continue to fall, but at a slower rate. "It won't show enough of a deceleration to cause problems," he said. But "the closer it gets to zero, the more people will worry."

Trade gap

The weaker dollar won't show up in December's trade data, which will be released Friday. The MarketWatch consensus is calling for the deficit to widen to $15.6 billion from $15.5 billion in November.

The attention will be on exports, Naroff said. Investors want to see if U.S. sales are picking up as Asia stabilizes. "Orders are coming back," Naroff said, but "we haven't seen a cutback coming out of Latin America."

Naroff said the Latin American slowdown isn't nearly the disaster Asia was. "It isn't going to cost us a point off growth," he said, but he does see the trade gap at a temporary plateau before another downward movement in exports.

The manufacturing sector has reflected the resumption of export growth. The sector is still contracting, but is showing signs of bottoming out, Naroff said. It'll take months before a full-fledged recovery in the factories, he said. "Maybe in June we'll be looking at it really carefully."

Production

As it stands, the MarketWatch consensus calls for industrial production to be unchanged in January. Don't be surprised if it falls a tenth or two. Hours worked were down in January and the leading surveys from the National Association of Purchasing Management and the Federal Reserve banks are showing continued weakness.

Trade and manufacturing are side issues, however.

"What's important here is inflation," Berner said. "The Fed is now biased toward restraint and Greenspan will make that clear."

"The Fed won't make a move until they see overt signs that inflation has changed direction," Berner said.

Naroff agrees. "The Fed is going to hold out as long as they absolutely, positively can," he said. "Unless they're seeing it in the inflation numbers, they aren't going to do anything."

The Fed is almost back where it was before Asia threw a scare into policymakers. With growth running ahead of expectations, but inflation remaining under control, the Fed will hint at higher rates and let the bond market do the rest of the work.

So far, the market has done everything that's expected of it: The yield ($TYX)
TYX, +2.06%
on the 30-year Treasury bond has risen from 5.07 percent on Jan. 14 to 5.42 percent on Feb. 12.

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